Americans spend at weakest pace in 20 months

June 27, 2011

WASHINGTON (AP) - Americans spent in May at the weakest pace in 20 months, a sign that high gas prices and unemployment are holding back the economy.

Consumer spending was unchanged, the Commerce Department said Monday. That was the worst result since September 2009. And when adjusted for inflation, spending actually dropped 0.1 percent.

April's consumer spending figures were revised to show a similar decline when adjusting for inflation. It marked the first decline in inflation-adjusted spending since January 2010.

Incomes rose 0.3 percent for the second straight month. But adjusted for inflation, after-tax incomes increased only 0.1 percent in May, after falling by the same amount in the previous month.

Neil Dutta, an economist at Bank of America Merrill Lynch, pointed out that inflation-adjusted, after-tax income is now slightly lower than it was in January.

"It was a very poor report all around," he said. "I think it's clear that higher gasoline prices are taking a bite out of consumer spending."

Wall Street took the dismal consumer spending report in stride. Investors seemed more focused on encouraging news on Europe's debt crisis - French banks agreed to let Greece repay some of its debt more slowly.

The Dow Jones industrial average gained more than 50 points in the first hour of trading. Broader indexes also increased.

Consumer spending is important because it accounts for 70 percent of economic activity. The spike in gas prices has forced many consumers to cut back on discretionary purchases, such as furniture and vacations, which help boost growth.

Fewer jobs and high unemployment have left workers with little leverage to ask for raises. And slow wage growth hurts the broader economy because consumers have less money to spend.

Hiring slowed considerably this spring after a strong start at the beginning of the year. The economy created only 54,000 jobs in May, the lowest amount in eight months. That followed three months in which employers hired an average of 220,000 net new workers each month. The unemployment rate rose to 9.1 percent last month.

The economy expanded at an annual rate of 1.9 percent in the January-March period. Many economists believe that growth is only slightly better in the current April-June period.

An Associated Press survey of 38 top economists predicts that the growth rate will be about 2.3 percent in the current quarter. Economists are more optimistic for the second half of the year, saying growth should pick up to a 3.2 percent pace.